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HMRC internal manual

VAT Input Tax

HM Revenue & Customs
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Motoring expenses: relief/replacement cars


Agreement with trade organisations

HMRC have agreed with trade organisations that relief/replacement cars should be treated in the way set out in this manual. In the situation where either:

  • the lessee makes its own arrangements for replacement cars when the need arises and is charged directly by the daily rental company; or
  • the lessor provides a car to the lessee when the need arises and makes a separate identifiable charge for each replacement car

the replacement car is being let on hire. If the customer is using it for business and private purposes the 50% input tax restriction will apply to the hire charge.

Administrative concession

Businesses in this position are entitled to make use of an administrative concession. See Notice 48.

Some lessees have agreed with leasing companies that they will pay for the first 24 hours use of a relief/replacement car. This is done to reduce their monthly maintenance charge.

Any use over this is covered by the maintenance charge. When this happens the concession will apply because the business only pays a one day hire charge (the extra days not being charged for).

A relief/replacement car may be provided as a genuinely optional additional service. A monthly charge may be made to cover the eventuality that a car may be needed. HMRC will not treat the monthly charge as representing the hire of a car provided the car is made available for not more than 28 days following:

  • mechanical breakdown; or
  • accident to the lease car.

The 50% input tax restriction will not apply to the VAT on the monthly charge.

Three way and parallel agreements

Some contract hire companies enter into three way agreements with finance houses. Under a joint agreement with the lessee, the finance company funds the provision of the car to the lessee and the contract hire company provides all the services. Or sometimes there may be parallel contacts between:

  • the finance company and the lessee;
  • the contract hire company and the lessee; and
  • the finance company and the contract hire company.

In general the finance company owns the car. The contract hire company is the Registered Keeper of the Vehicle. It also takes the residual risk at the end of the contract by buying the car back from the finance company.

The finance company will typically issue a single invoice in its own name to the customer for the car and any services. The amounts paid by the lessee for the services will be passed on to the contract hire company by the finance company.

When this happens HMRC’s view is that the finance house must treat the money it charges for Vehicle Excise Duty and vehicle delivery charges as part of its supply of leasing services. The customer has to apply the 50% input tax restriction to the VAT on these items. The contract hire company must treat the payments for these items as part of its taxable supply to the finance company.

Under three way and parallel agreements any excess mileage charges are levied by the contract hire company. This is in spite of the fact that the finance company is the vehicle owner. The hire company retains the excess mileage service charge element. It passes on the excess mileage finance charge to the finance company.

HMRC’s view is that the hire company acts as the agent of the finance company in charging the excess finance charge to the customer. This is in line with section 47 of the VAT Act 1994.

The customer has to apply the 50% input tax restriction on the excess finance charge. The customer does not have to apply the 50% input tax restriction on the excess mileage service charge retained by the hire company.